Think The Biggest Real Estate Investing Opportunities Are Behind Us? Think Again.
This article is courtesy of J.Stark at MyRenatus
We’re not huge fans of traditional New Years Resolutions per se, but rather, we believe in a continuous process of learning, adapting to change and always striving for the best possible outcome in each moment. With the end of January already upon us we’d like to take a few moments to take stock in what we learned in 2014, while keeping a keen eye on what to watch in the US real estate market in 2015. We realize, one could spend a lifetime analyzing 2014 data points, but we’ll save that for the Wall Street PhDs. Instead, our team has compiled a highlight reel of juicy nuggets to help you keep the pulse of the market.
The US real estate market finished 2014 strong, showing continued signs of stabilization with a positive outlook for 2015. Join us for a pulse of the market across residential, commercial, retail and real estate development.
In 2014 the number of residential foreclosures fell to the lowest levels yet. Simultaneously, delinquent mortgage payees fell to the lowest level in six years. Combined, we see reduced home inventory as fewer short sales and foreclosures come to market. Home prices rose in 246 of the 277 cities tracked by Clear Capital, a provider of real estate data and analysis. However, in two-thirds of the cities with price increases, the gains were lower than they were the year before; another indicator the real estate market is stabilizing.
In addition to residential sales, home building is up for the third consecutive year, despite slow starts and stops in individual markets. Builders are beginning to trickle through the bottle neck of rebuilding labor forces and infrastructure in the face of today’s constrained financial markets. Even so, demand for single family homes continues to outpace supply given the previously mentioned decrease in short sales and foreclosures that had been previously been feeding the market. The National Association of Home Builders predicts this trend will continue well into 2015 as construction of single-family homes is outpaced by construction of multi-family units.
The multi-family residential sector continues to be hot, and not just in high cost markets like San Francisco and Manhattan. We’re seeing continued growth in multi-family housing nationwide. From the construction perspective, the US multi-family sector has seen five years of double digit, year over year growth. Rental markets are rebounding as well, with the majority of US markets reporting less than 5% vacancy by the end of 2014. As a result, rents continue to rise 3% on average year over year. At the same time, as more Baby Boomers and Millennials, the two largest consumer segments choose to purchase homes; we’ll need to watch for a fluctuation in demand in the rental market.
As we look at all the positive momentum in the residential sectors, we also need to take a look at consumers from a demographics perspective. The largest consumer segment to purchase new homes in 2014 was the upper-aged Millennials, the twenty-eight to thirty-four years old folks, also known as Gen Y, followed by Gen X and the Baby Boomers respectively. We look at consumer patterns by age bracket because buying patterns are influenced by age related factors like lifestyle preferences, life stage and income. This is especially important when evaluating real estate investments opportunities; although we save that full discussion for a later time.
As we look across the industry at real estate’s other sectors, like commercial, retail and development, not only did 2014 finish strong, but 2015’s outlook is promising as well. Commercial real estate, which is heavily influenced by our job market, saw significant recovery in 2014, realizing its biggest gains since 2006. National unemployment fell a full point from 2013, down to 5.6% contributing to the increase in office employment by over 850,000 employees. This increase in the workforce is fueling the sectors need for more office space. Office space vacancy levels fell only marginally at 30 basis points, ending 2014 at 14.5% from 14.8% in 2013, but overall, the sector is becoming increasingly active. Landlords are increasing rent and developers are taking on new projects. In 2014, new office space under development was up 74% from the previous year at 103.9 Million net new square feet.
In the retail space, the main driver of retail construction has been demand for Class A space. While most markets are experiencing a short supply of available Class A space, the tightened financial regulations combined with an acute awareness of our market’s recent volatility means developers remain cautious. For example, in the boom times, retail developers built on average 22.3 million square feet a year, with less than 30% of that space committed to leases preconstruction. In 2014, 88% of all new construction was tied to lease commitments from future tenants. So what does this mean for 2015? Analysts urge those in the space to remain cautious. While demand is clearly outpacing construction, big box and mid-tier retailers are still consolidating as consumer retail spending is sluggish to recover to pre-recessionary levels.
Stabilization of the US real estate market sounds great, but what does that mean? From an economics perspective that means we’re returning to the days of traditional supply and demand principles. Home buyers will continue to flood the market because they want to get in while prices are low. This includes international buyers looking to skirt volatility in their own countries. We’re also continuing to see record low mortgage rates. Despite seeing the biggest drop in mortgage rates in eleven years in 2014, average mortgage rates hit a new low of 3.63% for a 30 year mortgage, just last week, according to Freddie Mac. That’s lower than they’ve been since May 2013. Private lenders are reducing minimum down payments from 5% to 3%, following Fannie Mae and Freddie Mac. With mortgage rates this low and financing so readily available, it continues to be an excellent time not only for new home buyers, but for refinancing and investors as well. Especially, with so many current homeowners equity positive for the first time in years.
In 2015 the US is going to continue to see the expansion of development projects urbanizing the suburbs. Buyers and investors have more markets to choose from as developers continue to bring urban mixed use concepts to suburban areas. Suburbs aren’t just growing, their evolving. Today’s consumers want more thoughtful public spaces and mixed use offerings. They want retail, entertainment, residential and office space all in one place, and developers plan to deliver.
Earlier, we took a brief look at the generational groups driving new home purchase and rentals in 2014, but the bigger question is, “How will these generations impact the future of real estate?” FORTUNE describes the upcoming potential as the real, real estate revolution, one that has yet to even begin. Why? Millennials are the largest consumer base in the US. These youngsters have the largest amount of student debt in history, have joined the workforce during the country’s biggest recession since the Great Depression and as a generation have very different ideals about home ownership and career. More Millennials than any other generation are choosing careers with telecommuting as well as jobs by design like freelance. That translates into a real estate need for live-work space to accommodate this generation’s lifestyle. As the Baby Boomers approach retirement, the second largest consumer population, their lifestyle needs will change as a result of aging. Many will look to downsize homes, or opt for partial and full care facilities to meet their needs. As the needs of any one generation changes, society and the real estate market will have to adapt.
We all know past performance can’t predict the future, and no one has a crystal ball. We hope by sharing some key 2014 highlights along with some areas to watch in 2015 that we can help you keep the pulse of the US real estate market. In the words of Barbara Corcoran, “A funny thing happens in real estate. When it comes back, it comes up like gangbusters.”